Bank of Canada holds interest rate, cost of fixed mortgages may rise – About Your Online Magazine

A record low nightly rate won’t stop you from spending more on a fixed rate mortgage

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In a move that shocked no one, the Bank of Canada on Wednesday held back its most scrutinized interest rate hike.

Since March of last year, the central bank has kept its overnight rate at 0.25 percent as a means of encouraging investment in the economy while remaining stunned by COVID-19. The country’s recovery is progressing, but not fast enough for the BoC to decelerate its extraordinary measures.

With the overnight rate set at 0.25% for a while, variable mortgages should remain attractive for some time. But if you prefer fixed rate products, inaction on the part of the Bank of Canada may not prevents you from paying more when it comes time to buy or renew.

What the Bank of Canada had to say

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The Bank of Canada feels that maintaining the overnight rate – which is the interest rate banks charge when they lend each other money – is still a necessity at this time of the country’s recovery.


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While economic activity in the first quarter of 2021 was “considerably stronger” than what the Bank had predicted in January, a new wave of blockages in April eroded employment gains and prevented consumer spending from getting back on track.

“The virus and the blockages have had very different impacts across sectors, companies and groups of workers, creating an unusual degree of uncertainty about how much slack in the economy and how long it will take to absorb,” the Bank of Canada said in a statement.

The Bank also said it would continue to buy government bonds at a rate of $3 billion a week. The move will help prevent the kind of rise in inflation that could make an unexpected rate hike necessary, said Dominion Lending Centers chief economist Dr. Sherry Cooper.


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Inflation sets the pace

The Bank expects inflation to remain a problem in the near term. Inflation is currently hovering around 3 percent, largely because of the discrepancy between today’s prices and the much lower prices that resulted from last year’s pandemic. The BoC projects that inflation will decline to 2 percent in the second half of the year.

This 2% inflation target is key. Until an inflation rate of 2 percent is “sustainably achieved”, says the Bank, the overnight rate will remain at 0.25 percent. This is not expected to happen until the second half of 2022.

That’s good news if you have a variable rate mortgage. A static overnight rate means no further upward pressure on Canadian banks’ prime rates. And if the base interest rate doesn’t change, the variable mortgage rates don’t either.


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Still, most homeowners and homebuyers will have no reason to celebrate. More than 70 percent of Canadians opted for flat-rate products in 2020, according to Mortgage Professionals Canada.

Why Fixed Mortgage Rates Can Increase

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The Bank of Canada has little control over fixed mortgage rates. These are mainly determined by activity in the securities market. Simply put, when Canadian government bond yields rise, fixed mortgage rates tend to rise as well.

It is difficult to predict the bond market, but a stronger economy typically increases the value of government bonds. If the economy takes off and investors earn higher returns on their bonds, fixed mortgage rates will continue to rise.


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“Although the Bank of Canada rate has been at historic lows since the crisis began, mortgage rates have risen and then fallen, and are now rising again,” Royal LePage CEO Phil Soper told MoneyWise.

That said, Soper doesn’t see an increase in fixed rates anytime soon. In addition to requiring a certain level of turmoil in the bond market, higher fixed rates also depend on lenders’ decisions.

some can lower your rates to stay competitive – a strategy the mortgage market saw in 2020, when HSBC announced a five-year fixed rate at an eye-popping rate of 0.99 percent. Other lenders may raise their rates because they think a new offering makes their services attractive enough to secure some extra basis points.

“I think we’ve gone up about 35 basis points from the lowest level we saw in 2020,” says Soper. “The five-year fixed rate is still extremely low by historical standards, but it has risen materially from its lowest point.”


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How consumers should react

While the certainty that accompanies fixed-rate mortgages is highly attractive, Soper says buyers should still consider opting for the variable path.

“Especially for younger buyers, my advice is to seriously look at open, variable, and short-term mortgages,” he says. “They are typically, in the long, long term, materially cheaper than five-year fixed mortgages. If interest rates rose quickly, they could be more expensive. But history shows that this doesn’t happen very often. ”

Regardless of what is happening in the market, the lower mortgage rates they usually go to borrowers with the best credit scores. Anyone interested in buying or refinancing should check theirs for free and see if it needs improvement.


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Soper remains optimistic about the future of the Canadian housing market. Even with the supply increasing as eager sellers seek get a great price in a more or less post-pandemic market, there is simply too much unmet demand for housing prices to fall – and that’s before an influx of new Canadians and returning international students starts to arrive.

“At the moment, sales volumes are very high – exceptionally high,” he says. “This, I believe, will continue for about another year.”

This article was created by Wise Publishing, Inc., which provides clear, reliable information that people can use to take control of their finances. Millions of readers across North America have come to rely on the Toronto-based company to help them save money, find the best bank accounts, get the best mortgage rates, and handle many other financial matters.


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Paula Fonseca